The banking system is the financial “oxygen supplier” of most of the Israeli construction industry. The banks are the ones who provide banking support to the contractors and they are also the ones who provide most of the mortgages to the general public. In light of the extensive knowledge they possess in this area, it is interesting to find out how the banks see the state of real estate prices in Israel, 2022-2023. The good news, senior officials of the banking system believe that we are facing a period of significant price drops.
The interest rate is rising, the contractors are stressed
The senior members of the economy in the field of banking and finance in general present a uniform vision in understanding the current and future market situation. The latest publications of the senior officials indicate an estimate of a price drop of up to 10 percent. It is understood that the extent of the declines depends greatly on the characteristics of the various regions in the country. In the demand areas, the drop in prices is expected to be lower than expected in the periphery. At the same time, the fact that the public in general and investors in general have moved to a situation of “sitting on the fence” and the rate of transactions has decreased, imposes difficulty on the contractors. It is very possible that soon the contractors will return to offering benefits to buyers, a situation that became quite rare when the rate of increases was accelerated as we saw in 2021–2022. The rise in interest rates imposes a heavy financial burden on the contractors, especially those who do not have a financial “safety cushion”. The need to close deals increases the pressure to lower prices.
These are the price drops contracted by the banks
The two largest banks in Israel, Hapoalim and Aomi, believe that from 2023 until 2024, the increase in prices will slow down and a significant price drop will begin. Bank executives, according to various reports, gave estimates of a drop of several percent, and possibly as much as 10 percent. Discount Bank stated that according to the bank’s economists, the indicators show a need for price correction, after the increases of the last few months.
Leumi’s chief economist, who estimated that inflation will decrease in the coming year, referred to several things that will freeze and even lower real estate prices, especially housing. For example, the increasing signs of a slowdown, the jump in the cost of money (interest rate increase), as well as the upward revision of the purchase tax. The estimates are to curb the increase Or price drops, but not as sharp as Discount believes. Blaomi also mentioned the increase in building permits that affects the real estate industry.
The investment houses are also predicting declines
Along with the senior bankers in the economy, the investment houses have also studied well the signs of an economic slowdown. The analysts of investment houses such as Altshuler, Fishman, Psagot and others, expect a price drop of up to 10 percent. Officials from Altshuler recently stated that at interest rates of 5 to 6 percent per year, the ability of the contractors to maintain the price decreases. It is very possible that even if the prices on paper do not go down, contractors will be ordered to provide significant benefits worth money.
Senior officials from Meitav Dash stated that indicators in the capital market can also teach about the plight of large real estate companies. Companies that issued bonds are now seeing how bond prices are falling. When the price goes down and the yield goes up, it means that the public appreciates that this is a difficult or at least challenging time for the big contractors. And there is reason to estimate that we will see an effect on the second-hand market as well. If we do see price drops in new apartments, this will eventually seep into the second hand market as well. It can be noted that the Bank of Israel’s reforms may also have an effect on strengthening this trend.
On the sidelines, we note that the tax exemption on income from renting apartments will soon be updated. Some predict that the consequence of this fact will be a certain increase in rent prices in Israel. Recall that in light of last year’s inflation, the tax exemption is expected to be updated accordingly. Apartment renters who were afraid of raising the rent beyond the 5200 line will be able, according to estimates, to reach close to NIS 5500 without reporting and paying a 10 percent tax. This is additional fuel for the obvious cost of living, at the same time as the increase in mortgage repayments experienced this year, in a painful way, by the majority of mortgage holders in Israel.
